How Conflicts Affect Economic Forecasts

A closer look at the impact of the USA/Iran war on Egypt’s economy and the short term outlook suggests that the early signals point to a multi front economic shock. The Egyptian pound has weakened to around 50 EGP per US dollar due to capital outflows and higher demand for foreign currency to cover imports. Despite the pressure on the currency and stock market, Egypt’s foreign reserves remain relatively strong at about $52.6 billion. Renewed Red Sea security risks have forced major shipping lines to reroute vessels away from the Suez Canal, threatening Egypt’s expected recovery in canal revenues after sharp declines in the past two years. Energy pressures increased after Israel halted key gas fields, reducing part of Egypt’s gas supply and pushing the country to import more LNG while global oil and gas prices rise. Higher energy and shipping costs are increasing inflation risks and could slow Egypt’s economic recovery if the conflict continues. Overall, the conflict has created immediate economic pressure on Egypt just as the economy was beginning to stabilize. A short conflict may be manageable, but long one could weaken growth and delay the economic recovery. #EgyptEconomy #MiddleEast #Macroeconomics #EnergyMarkets #GlobalTrade #SuezCanal #Inflation #EconomicOutlook #Geopolitics #EmergingMarkets

Trade tensions are threatening what has been a favorable credit environment for most borrowers. The April 2 tariff announcements by the U.S. (and the subsequent escalation in the trade conflict between the U.S. and China) went far beyond what financial markets had imagined and exceeded our previous assumptions. If the paused U.S. tariffs are implemented in full, the economic and credit fallout would be broad and deep. ➡️ Given the intensifying global trade tensions—and the potential effects on economies, supply chains, and credit conditions around the world—our forecasts carry a significant amount of uncertainty. ➡️ As a result, we are taking a measured approach to rating changes and evaluating the impact on a credit-by-credit basis since supply chains can vary greatly for similar entities. ➡️ As situations evolve, we will gauge the macro and issuer-specific credit materiality of potential and actual policy shifts and reassess our guidance accordingly. Read more insights in #CreditWeek from Gregg Lemos-Stein, CFA, Nick Kraemer, FRM, and Alexandre Birry from S&P Global Ratings special credit conditions update. ⬇️

THREE SCENARIOS FOR THE GLOBAL ECONOMY AND THE IRAN CRISIS As the petrochemicals business wrestles with its worst‑ever downturn – now more than four years long – the US and Israeli attacks on Iran represent a renewed threat to the industry. This comes through potential impacts on the Strait of Hormuz, oil prices and, as always, the best, medium and worst‑case outcomes for the global economy - https://lnkd.in/gAWE8DVp The crisis in petrochemicals was caused by too much capacity chasing too little demand, especially in China, whose petrochemicals consumption far exceeds its population share. Over the same period, the US economy has remained strong, Europe has scraped by at low growth and the Developing World ex‑China has expanded rapidly. But now the worst‑case scenario from the Iran conflict could overturn this balance and potentially trigger a global recession. There are many other angles we must consider. How might the US midterms be affected by a limited conflict versus a broader one? What happens to petrochemicals and LPG feedstock availability if transport through the Strait of Hormuz is disrupted? I will explore these second‑ and third‑order effects as the crisis evolves. Meanwhile, here is my first pass at three global‑economy outcomes: 1. Best Case – “Contained shock, no global recession” Tension continues, but controlled or escorted tanker flows resume. Oil remains elevated but manageable (roughly $78–90/bbl). Inflation rises modestly; global growth slows slightly but remains positive. Financial markets stay volatile but stabilise as logistics normalise. Outcome: A mild drag on growth, but the world economy keeps expanding. 2. Medium Case – “Persistent disruption, slower global growth” On/off shipping interruptions, high insurance costs and tanker queues persist. Oil trades higher (roughly $85–105/bbl) with occasional spikes above $110. Inflation rises further and growth softens; some regional recessions emerge. Consumer confidence weakens in major importers; financial markets stay risk‑averse. Outcome: A weaker global economy, but still not a deep worldwide downturn. 3. Worst Case – “Sustained chokepoint → global recession” Multi‑week or multi‑month shipping disruption keeps most tankers away. Oil surges into the $110–150/bbl range as large volumes become stranded. Inflation accelerates sharply; real incomes fall; industrial activity contracts. Central banks face difficult choices as demand collapses and unemployment rises. Outcome: A high likelihood of a full global recession.

New Global Dataset on Economic Policy Uncertainty During Armed Conflict We just released a new global dataset covering monthly Economic Policy Uncertainty (EPU) for 192 countries from 1989–2024, adjusted to capture the true uncertainty during periods of armed conflict. Why is this important? Standard EPU indices paradoxically decline during conflict because news coverage on economics and policy is crowded out by war reporting. Using topic modeling and a two-way fixed effects adjustment, we correct this measurement bias. The adjusted index (shown in the Figure below) shows the expected sharp rise in policy uncertainty during conflict, better aligning with firm perceptions, political risk insurance claims, and macroeconomic outcomes. This opens the door to studying EPU as a channel through which the costs of conflict spread both across time (anticipating conflict) and across countries (from conflict affected countries to non-affected countries). Future research could explore, for example, how investment is subdued by conflict risk or how events like the arab spring affected invstement through the EPU. (See also Joan Margalef's work) 📄 Read the CEPR working paper: https://lnkd.in/dFCSHbv9 📄 BSE working paper: https://lnkd.in/d8bVQ6Bm 🌐 Data will be updated regularly at EconAI. For now you can download it here: https://lnkd.in/dh_NMVyu. We provide the raw data - use with care as country coverage in our corpus is not perfect. Filter for countries with many articles if you use this at the monthly level. Christopher Rauh Sophie Brochet Nick Bloom Javier J Perez Corinna Ghirelli

Europe’s Growth Gradually Accelerates Despite Tariff Headwinds  I’m pleased to share the March 2026 edition of the EY European Economic Outlook! 🚀 In this edition, the #EY Economic Analysis Team (EY EAT) examines Europe’s economic trajectory across countries and sectors, the short- and long-term effects of recent tariff changes, the impact of the EU-India Free Trade Agreement, and key risk factors, including the economic implications of scenarios related to the escalation of the conflict in the Middle East. 🌍 Key highlights from our report: ✅ Despite improving underlying trends, headline euro area growth is expected to slow to 1.3% in 2026 from 1.5% in 2025, primarily due to the unwinding of Ireland’s staggering 2025 growth. Euro area growth is forecast to re-accelerate to 1.4% in 2027 and 1.5% in 2028-29 ✅ Poland is projected be the fastest growing EU economy in 2026. Germany, Italy, the UK, and Switzerland are expected to be among the slowest growing, although Germany should finally emerge from stagnation ✅ Unlike in the US, AI-related investment in Europe is not booming ✅ Inflationary pressures are expected to remain contained in the euro area, with headline and core #inflation close to 2% ✅ With inflation near target and growth stable, we expect the #ECB to keep rates unchanged, although risks are tilted to the downside ✅ The recent US Supreme Court verdict changes little for the #EU, as the baseline rate is likely to remain at 15% ✅ #Tariffs had only modest effects in 2025, but we project a more negative drag in 2026, with euro area #GDP 0.5% lower relative to a no-tariff scenario   ✅ EU-India Free #Trade Agreement: The removal of goods tariffs should support India’s long‑term growth, while the estimated impact on EU GDP is broadly neutral. Some EU extraction and manufacturing sectors should benefit from improved access to Indian inputs and stronger export opportunities, whereas textiles and clothing may face stronger competitive pressures ✅ Middle East conflict escalation: According to our simulations, in a scenario of temporary energy price increases, the conflict in the Middle East could raise euro area inflation by 0.3 pp and reduce GDP by 0.2% in 2026. In a scenario of further escalation and a prolonged conflict, a sustained closure of the Strait of Hormuz could increase #oil prices by over USD 40/bbl and European #gas prices by USD 20/MMBTU in 2026 Q2, with the shock fading only very gradually over subsequent quarters. We estimate that such a scenario would reduce euro area GDP by 1.3% by 2027 and push HICP inflation to around 5% 📈 Access the full analysis via the link below.   https://lnkd.in/dNKNj4Se We invite you to subscribe to EY EAT Macroeconomic Insights for regular updates and in-depth commentary on key global trends. #Macroeconomics #Geopolitics #Investment #GlobalTrade #BoE #Fed

The Enduring Economic Impact of the Ukraine Conflict on Europe The ongoing conflict in Ukraine has profoundly reshaped Europe’s economic landscape, with repercussions expected to persist for decades. Beyond the immediate humanitarian crisis, the war has precipitated significant shifts in defence spending, energy policies, and fiscal strategies across the continent. Escalation in Defence Expenditure In response to heightened security concerns, European nations are undertaking substantial increases in defence budgets. Projections suggest that Europe’s annual defence expenditure may need to double, reaching approximately 4% of GDP, which equates to an additional $420 billion per year. This surge in military spending is driven by the necessity to address emerging threats and reduce reliance on external security guarantees. However, financing this escalation presents challenges, especially for countries constrained by existing debt levels and sluggish economic growth. Discussions are underway regarding potential reforms to fiscal policies, including the possibility of exempting defence investments from traditional debt constraints. Energy Market Realignment The conflict has also catalysed a dramatic reconfiguration of Europe’s energy landscape. Historically dependent on Russian energy imports, European countries have been compelled to diversify their energy sources. This transition involves increased imports of liquefied natural gas (LNG) from alternative suppliers, notably the United States, and a concerted push towards renewable energy investments. While these efforts aim to enhance energy security, they entail significant infrastructure investments and may lead to elevated energy costs in the short to medium term. Fiscal Implications and Economic Growth The combined pressures of augmented defence spending and energy market adjustments are exerting considerable strain on European economies. Governments face the delicate task of balancing these demands with existing social welfare commitments. The potential reallocation of funds towards defence and energy infrastructure could necessitate reforms in fiscal policies, including possible adjustments to debt regulations and the exploration of new financing mechanisms. Long-Term Outlook The enduring impact of the Ukraine conflict is poised to redefine Europe’s economic and strategic orientation for decades. The necessity for increased defence capabilities and energy independence is prompting a reevaluation of fiscal policies and economic priorities. While these adjustments are essential for ensuring long-term security and stability, they require careful management to mitigate potential economic disruptions and social challenges. As Europe navigates this complex landscape, collaborative efforts and strategic planning will be crucial in addressing the multifaceted repercussions of the conflict.

The war in Iran may feel distant from farms and rural communities, but agriculture today is deeply interconnected with global energy, fertilizer and logistics systems. When geopolitical tensions rise in the Middle East, the effects do not remain regional. They travel quickly through the agricultural value chain. The timing of the current crisis is particularly sensitive. Between March and June, roughly 125–150 countries enter key planting periods for staple crops. During this window, farmers across North America, Europe, Asia, Africa and parts of Latin America make crucial decisions on seeds, fertilizer and land preparation. In total, an estimated 600–700 million hectares of farmland will move through planting or early crop establishment during this period or nearly 40–45% of global cropped area. This stage of the agricultural cycle is when fertilizer demand peaks. Nitrogen, phosphate and potash are applied early to establish yields that will determine food production months later. When fertilizer prices rise suddenly, farmers face difficult trade-offs: absorb higher costs, delay purchases, or apply lower nutrient. The implications extend well beyond the farm. At the input stage, disruptions in energy markets and shipping routes will push fertilizer prices higher. If energy costs rise or logistics slow, fertilizer becomes more expensive and less predictable for farmers. At the production stage, farmers may respond by reducing fertilizer application rates or shifting crop choices. A reduction of 10–20% in fertilizer use in key crops can translate into 5–15% yield declines, particularly in high-input farming systems. The immediate consequence is lower productivity per hectare. The effects then ripple into the post-harvest and processing stages. Lower harvest volumes mean tighter supply for grain traders, feed producers, food processors and textile industries. Livestock production can also be affected as feed costs rise. Finally, the shock reaches consumers and global markets. When production expectations decline across multiple regions simultaneously, commodity prices respond. Food-importing countries, particularly in developing regions, feel the pressure first through rising food prices and increased fiscal burdens for subsidies. In other words, a geopolitical shock does not just affect fertilizer markets. It travels through the entire agricultural system-from energy markets to fertilizer factories, from farmers’ input decisions to global food prices. The key lesson is that agricultural resilience today is not only about climate or weather. It is also about supply chain stability and geopolitical risk. When conflicts disrupt the infrastructure that supports modern agriculture, energy, fertilizers, shipping, the consequences can cascade through the entire food system. Wars may be fought with missiles and drones. But their consequences often appear months later in something far more fundamental: the cost and availability of food.

On the implications for the global economy of the Iran-Israel conflict: When I was asked early Friday morning about the global economic implications of Israel’s unprecedented strike on Iran, I responded with four main hypotheses in which the direction of impact was clear, while the magnitude depended on the duration and scope of the conflict. The four: Slower Global Growth as mounting geopolitical uncertainty dampens business investment and consumer confidence. Inflationary Pressures in the context of uncertainty about shipping lanes and, more broadly, global supply chain vulnerabilities. Reduced Policy Flexibility for some countries, including the UK, as central banks face harder choices between fighting inflation and supporting growth, and fiscal space tightens. Further Gradual Erosion of the Global Order, including America’s role at the core of the trade and payments systems. Two days into intensifying hostilities, both the probability and potential severity of these four effects have risen, confirming the notion that, in economic terms, this constitutes an adverse shock to an already fragile global economy. #economy #markets #IranIsraelConflict

The military conflict with Iran is devastating for everyone involved, but the economic fallout has been limited, at least so far. Global oil prices are up about $5 per barrel, and U.S. stock prices are down about 1% in immediate reaction. There is no economic upside to any of this, as the higher oil prices will weigh on growth and push inflation higher. This will, in turn, heighten Americans’ affordability concerns and complicate the conduct of monetary policy, as the Fed will be unsure whether to respond to the weaker growth by lowering rates or to the higher inflation by raising rates. But if markets settle near current prices, the stagflationary fallout will be limited. A good rule of thumb is that every sustained $10 per barrel increase in oil prices will increase the cost of a gallon of regular unleaded by 25 cents, increase inflation as measured by the consumer expenditure deflator at the peak of the impact one year after the increase in oil prices by .15 percentage points, and reduce real GDP by .10 percentage points. The impacts then fade quickly, as the hit to consumers from the higher oil prices is eventually offset by the boost to oil producers – the U.S. produces about as much oil as it consumes. This suggests that if the increase in oil prices is held to $5 per barrel and isn’t sustained, the economic consequences will be negative, but small. Let’s hope the conflict resolves quickly.

The new Middle East and North Africa Economic (MENA) Update is out. Our forecasts put real GDP grow for 2024 at 2.2%, a modest increase from 1.8% in 2023.   While the region is strained by fragility, conflict, & uncertainty, it has significant untapped potential. A simple development accounting exercise shows that increasing the employment rate (especially for women) and boosting productivity - both via allocative efficiency and innovation - are two key levers to sustain long-term growth: Over the past 50 years, schooling in MENA has rapidly increased, especially for women. We estimate that closing gender employment gaps would imply a 51% ⬆️ in per capita income in the typical MENA country.   The report also finds that reallocating talent from the public sector (which crowds out private sector employment, particularly for women) to the private could lead to gains in aggregate productivity, ranging from 5-9% in countries like Egypt, Jordan, and Tunisia to ~45% in Algeria.   Tapping into global knowledge will also bring the region closer to the technological frontier. More international trade can facilitate this process of infusion and innovation. And better data access can stimulate the circulation of ideas.                               But conflicts can cast long shadows on a country’s economic growth. Our analysis shows that, without conflict, income per capita in conflict-affected countries could have been on average 45% higher, measured 7 years after the onset of conflict.   Peace and stability provide the foundation upon which a sustainable future can be built. Find the report at --> https://lnkd.in/gsDDgW8B